Description
Cognitive evaluation theory and its hypothetical construct of intrinsic motivation are enjoying increasing popularity
in the fields of business administration and economics. Consequently, intensifying skepticism towards performance
incentives and agency theory is postulated. According to cognitive evaluation theory, it is argued that performance pay
may undermine an agent’s intrinsic motivation. In contradiction to agency theory, the principal might be worse off
when providing an incentive contract to the agent than without doing so. Since the contention is substantiated by
empirical evidence, it seems worrying enough for further investigation. Restricting attention to performance pay in
business corporations, the scope of this article is to evaluate whether agency theory faces an urgent need to incorporate
the construct of intrinsic motivation and its ‘hidden costs of reward’ as postulated by supporters of the concept. The
subsequent analysis reveals good and bad news for agency theory. The bad news is that hidden costs of reward do
indeed exist. The good news is that the empirical evidence on undermining effects cannot be interpreted as being contradictory
to agency theory.
doc_170968396.pdf
Cognitive evaluation theory and its hypothetical construct of intrinsic motivation are enjoying increasing popularity
in the fields of business administration and economics. Consequently, intensifying skepticism towards performance
incentives and agency theory is postulated. According to cognitive evaluation theory, it is argued that performance pay
may undermine an agent’s intrinsic motivation. In contradiction to agency theory, the principal might be worse off
when providing an incentive contract to the agent than without doing so. Since the contention is substantiated by
empirical evidence, it seems worrying enough for further investigation. Restricting attention to performance pay in
business corporations, the scope of this article is to evaluate whether agency theory faces an urgent need to incorporate
the construct of intrinsic motivation and its ‘hidden costs of reward’ as postulated by supporters of the concept. The
subsequent analysis reveals good and bad news for agency theory. The bad news is that hidden costs of reward do
indeed exist. The good news is that the empirical evidence on undermining effects cannot be interpreted as being contradictory
to agency theory.
doc_170968396.pdf